Disruption in African energy may be slow, but it is steady
Disruption in African energy is coming.
Hydrocarbons cannot exclusively meet Africa’s rising energy demand. The biggest game changers will be in power generation with the growth of renewables and natural gas and eventually electric vehicles (EVs) in transportation. For a continent that has not fully conquered how to meet fossil fuel demand efficiently in the form of petrol and diesel for local transportation or meet domestic electricity needs, this may be idealistic.
But markets evolve despite inefficiencies. Renewables already account for 20% of Africa’s installed generation capacity and globally will become the largest source of power generation by 2040, according to a report by the international oil company, BP. Meanwhile, the global EV and battery storage market is rising (more than 2m EVs were sold globally in 2018), and although Africa is still only a fraction of this market, the continent is undergoing an energy transition that should not be ignored.
When BMW CEO Harald Kruger stepped down from his role in July 2019, his departure was said to be accelerated by the firm’s failure to respond to the rise of car manufacturer Tesla’s premium EVs. Telsa’s US sales had skyrocketed in the past year, compared to the steep downward trend in sales of BMW’s sedan car.
We often forget that global trends ultimately impact Africa; witness the oil supply glut from shale production (and technology) of the past few years, which forced oil prices so low that the continent’s main commodity exporters were left with difficult economic headwinds.
- The BMW-Tesla case is a classic example of what happens when industry incumbents stay myopic. With disruptive technologies, the signs are always there: changing consumer preferences, oligopolistic industries (which stifle innovation to preserve the status quo and are thus blindsided by new entrants), efficient cheaper alternatives, negative consumer sentiment and rising consumer awareness.
The confluence of these factors could re-order Africa’s incumbent energy systems, with gas, renewables and transportation at their heart. Add up all the deficits of African utilities – estimated at $21bn annually – and you quickly realise the enormous amount of waste involved in maintaining a grid-based and fossil fuel system that has not served all.
Multiple fuel sources
The clarion call here is not for a zero-sum approach. Multiple fuel sources can co-exist in Africa. After all, the technologies that utilise alternative and cleaner fuel sources have not evolved rapidly across all African countries, while the infrastructure to support these is only slowly developing.
Take transition fuels such as gas. Compressed natural gas (CNG) is a gas transport technology that has been around for decades and should be a natural substitute means of use for many of Africa’s rural communities who are unlikely to ever consume piped gas due to the huge capital costs of piping to remote areas for domestic use.
But challenges with bulk transportation of CNG via trucking have constrained consumption via this method too, also known as ‘virtual pipelines’. There are some welcome signs of increased uptake of CNG in transportation.
- In January, two funds in Egypt signed an agreement to convert thousands of diesel-powered cars to CNG fuel, as part of a government policy initiative to improve gas consumption locally and incentivise consumption of low-carbon fuels.
- Africa has roughly 260,000 natural gas vehicles (NGVs) in operation, with only about 200 stations servicing these – hardly a revolution given the continent’s 42m-strong fleet.
However, market inefficiencies and infrastructure challenges create the very foundation for leapfrogging and disruptive trends that are likely to make other energy sources viable. These elements were a key driver of Africa’s mobile phone revolution.
- EVs, for instance, could well become more popular than or even leapfrog NGVs in some African countries given the challenges with CNG.
Technology and necessity
While preferences among Africa’s energy consumers have not radically changed since most still use equipment, generators, machines and vehicles that require fossil fuel energy sources to work, energy consumers are increasingly cost sensitive, and in many instances ecologically sensitive. Technological innovation and sheer necessity will ultimately force a shift in consumer preferences and choices, as seen with the rise of off-grid technology in Africa.
In just a few years, for instance, the market for basic solar-powered lights and home systems, phone charging and basic appliances has grown rapidly in the developing world, with more than 24m units sold. Imagine the implied revolution in making decentralised customers make small payments for bits of equipment and appliances over a period.
This model and type of disruption has aided the rise of pay-as-you-go solar companies such as M-Kopa, Off-Grid Electric, Bboxx and Arnergy. Together, they have raised more than $360m and serve about 700,000 customers, which is still only a small fraction of the addressable market on the continent.
Consumer preferences also point to cost as a future deterrent to specific modes of energy consumption in transportation. In Kenya, for instance, recent research showed that commuters spend up to 30% of their income on transportation due to high fuel costs. Moreover, the cost and fiscal burden on Africa’s fuel-based economies are a problem. Today, the cost of fuel subsidies across the continent averages out at around 1.4% of GDP.
With urbanisation rates of 4% annually and a corresponding increase in the vehicle fleet, a gradual shift to low-emissions transport systems should be seen by Africa’s policymakers as inevitable.
EVs will eventually become cheaper as battery prices continue to fall, while tightening emissions regulations are helping to shape emerging transportation technology and improve air quality. Renewables, such as solar photovoltaic, are being predicted to surpass coal as the largest source of power generation in Africa by 2030, underpinned by the fact that the costs of solar panels have fallen by more than 50% in the past decade.
Even the appliance systems that we have got used to, such as the LED light bulb, the simplest of which has fallen in cost by almost 85% and lasts 30 times longer than its incandescent counterpart.
Limits to disruption
There are, of course, limitations on the pace of the disruption in African energy.
- At least 40% of the African communities that use solar energy still rely on base load fossil fuel energy sources as a backup, given the obvious intermittency of solar. In addition, new hydrocarbon discoveries on the continent mean governments can’t abandon incumbent energy sources altogether; proven oil and gas reserves today stand at 125bn barrels and 87.7trn cubic feet respectively.
- A short-term priority should be how to harness these resources in a sustainable way and use the proceeds of their production to build inclusive and sustainable economies that thrive on a balanced and cleaner energy mix.
By: Rolake Akinkugbe-Filani, Head of Energy & Natural Resources, FBNQuest Merchant Bank, Nigeria. This article was originally published in The Africa Report.
Photo credit: REUTERS/Ludovic Marin/Pool